COUNTY’S COSTLY PENSION FUND EXCELS

Before San Diego County’s pension system outsourced its chief investment officer in 2009 in a 39-month deal worth up to $4.5 million, the fund was betting big on U.S. companies, European and Asian stocks and fixed-income bonds.

Four years later, the portfolio has shifted to less-traditional assets such as hedge funds, private equity and emerging-market debt.

The outside strategist managing the pool, Salient Partners of Houston, just received a new contract that could pay $45 million over the next five years.

The Watchdog is examining the makeup of the $9.1 billion public fund in response to the controversy over the re-upping of the Salient contract, which three retirement board members opposed as not being worth the added cost.

The board majority decided the strategist has found an investment mix that’s paying off for the agency, which boasts it’s in the top 1 percent of its peers in investment returns with a risk measurement lower than 81 percent of its peers.

The comparison of the fund before and after Salient Partners of Houston took over comes from a report by CEM Benchmarking, a Toronto firm that collates data for public and private investors across the globe.

According to the analysis of investment policies, the San Diego County Employees Retirement Association had 49 percent of its holdings in stocks in 2007. By the start of 2012 that percentage was 25, while the U.S. average for pension funds was 48 percent.

In 2007 the county policy called for no money in hedge funds, the study said. By the start of 2012, 20 percent of the pension fund was to be deposited into hedge funds, compared to the U.S. average of 4 percent.

San Diego County now invests 10 percent of its fund in emerging-market debt — bonds from nations like Russia, Brazil and Mexico, the study said. That’s up from 6 percent in 2007, and more than the average U.S. pension fund, which holds no such bonds.

Officials acknowledge differences between the county’s investment strategy and those of other public funds. They say the county fund is more diversified and better positioned over the long term to turn a profit in up and down markets.

“Asset classes such as hedge funds and infrastructure represent excellent diversification and return opportunities and are commonly used among sophisticated institutional investors around the world,” spokesman Dan Flores said in a statement.

The county portfolio reaped 6.5 percent in the last fiscal year, well above eight other public funds surveyed by The Watchdog last month.

The California state teachers fund earned 1.8 percent, and the state public employees fund 0.1 percent. Orange County, whose fund is very close to San Diego County’s in size and membership, collected 0.8 percent.

Despite the low risk measurement, a calculation based on variance in historic performance of the fund’s assets, critics worry that the higher returns mean San Diego County is making unsound choices.

“It makes no sense to have zero invested in domestic stocks, especially since domestic stock values have recovered since 2007,” said Marcia Fritz, who runs the California Foundation for Fiscal Responsibility, an advocacy group that has sued the agency. “It appears that SDCERA is going against the grain of sensible investment strategies.”

The San Diego County Employees Retirement Association fired its chief investment officer in March 2009 after the fund sank in value by more than $2 billion during the economic meltdown in 2008. The job had been held by David Deutsch, who earned $209,000 a year.

In October 2009, after the agency could not settle on any of 100-plus applicants to join the staff, the board hired a consultant, Lee Partridge, who had been an investment official at the Teachers Retirement System of Texas.

Partridge rewrote the county investment policy and by 2010 recommended a new strategy aimed at increasing returns while minimizing measured risk. The updated policy was approved unanimously.

Partridge merged his consultancy with Salient Partners of Houston later in 2010 and became the firm’s chief investment officer. Last month Salient was awarded a new contract that pays the company 2 basis points every quarter, an agreement worth as much as $45 million over the next five years.

Susan Mallett is a former county administrator who now is president of Retired Employees of San Diego County, a nonprofit that works to protect retiree benefits. So far, the retirees like what they see in Salient, Mallett said.

“We’re satisfied with the progress of our portfolio, at least for the past five years, especially given the volatility of the market,” she said.